Investors Could Be Concerned With Caulis' (TSE:153A) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while Caulis (TSE:153A) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Caulis:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.28 = JP¥414m ÷ (JP¥2.0b - JP¥467m) (Based on the trailing twelve months to March 2025).

So, Caulis has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Software industry average of 16%.

Check out our latest analysis for Caulis

Historical performance is a great place to start when researching a stock so above you can see the gauge for Caulis' ROCE against it's prior returns. If you're interested in investigating Caulis' past further, check out this free graph covering Caulis' past earnings, revenue and cash flow.

So How Is Caulis' ROCE Trending?

When we looked at the ROCE trend at Caulis, we didn't gain much confidence. While it's comforting that the ROCE is high, one year ago it was 37%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Caulis has done well to pay down its current liabilities to 24% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Caulis' ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Caulis. These growth trends haven't led to growth returns though, since the stock has fallen 14% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to know some of the risks facing Caulis we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.